What Hong Kong’s asset management industry wants from John Lee
The asset management industry in Hong Kong believes the city's new leadership should have two top objectives to help Hong Kong retain its competitiveness as an international financial centre: less stringent restrictions on international arrivals, and the liberalisation of how various market connect schemes with mainland China work.
“Different industries, including the fund management industry, have been battered by the Covid and travel policy,” said Sally Wong, chief executive officer of the Hong Kong Investment Funds Association (HKIFA).
“The fund industry would exhort John Lee’s government to put the act together so as to help the fund industry regain its competitiveness and propel it to the next level,” Wong told AsianInvestor.
Wong, who also sits on the Securities and Futures Commission’s (SFC) public shareholders group, thinks allowing quarantine-free travel to the rest of the world as soon as practicable is step one.
John Lee Ka-chiu became Hong Kong's fifth chief executive on July 1, the same day the city marked the 25th anniversary of its return to China.
The new administration comes at a time when a large number of expatriates are leaving Hong Kong. A survey by the Hong Kong Financial Services Development also found that banks and financial services organisations were finding it increasingly difficult to recruit qualified candidates from overseas.
“Decisions on when and how to re-open Hong Kong have real implications on issues such as attracting and retaining talent, and the medium and long-term decisions that firms in the asset management industry take as to where to establish and expand in Asia Pacific,” said Paul Moloney, a partner in corporate and securities practice at Mayer Brown.
Current rules mean that international arrivals to Hong Kong must quarantine for seven days in a government-designated hotel. In an interview with the South China Morning Post on July 13, Hong Kong’s new Secretary for Health Lo Chung-mau said the government aims to allow quarantine-free travel in time for a global financial summit that the Hong Kong Monetary Authority (HKMA) is hosting in November.
Hong Kong may gradually cut the length of hotel quarantine before this, Lo added.
But Neil Macdonald, head of asset managers segment for Asia Pacific at State Street, believes the expat exodus is just a temporary phenomenon, and Hong Kong will still be attractive to financial professionals after restrictions are relaxed.
“I'm greatly encouraged by the fact that the new leader has come in and said it (travel restrictions) is something that he is going to focus on,” Macdonald told AsianInvestor.
He thinks that if a week's quaratine is still the requirement in a year's time, more people in the industry will lose patience. “But I don't think that's going to be the case.”
The more important long-term item on the government's agenda should be to make the most of Hong Kong’s proximity to mainland China and facilitate larger capital flows by expanding connect schemes, he believes.
“I think the future, the prestige and prosperity of Hong Kong is still very much tied to its role as a gateway to mainland China, and a gateway to the Greater Bay Area (GBA) specifically,” said Macdonald. “I don't see that will change.”
The GBA is exciting because of the rise and the concentration of wealth. The main thing is that China is creating this sort of special economic zone in some respects, he noted.
“That, for asset managers that sell investment funds, is an incredibly exciting audience for their products.”
For these connections to work well, Macdonald thinks Hong Kong’s connections with the Chinese mainland and with the international community are equally important, making quarantine-free travel critical for both.
Others such as the Hong Kong-based chief investment officer of a regional life insurance company told AsianInvestor that they also think the GBA will be the most important development for the financial industry in Hong Kong in the long term.
The Greater Bay Area’s GDP was $1.67 trillion in 2020 – 12% of China's GDP. Guangdong province and the cities of Hong Kong and Macao are home to $686 billion of annual savings, according to Deloitte research in 2020.
Currently, Hong Kong operates several connect schemes with the mainland's financial system, including Stock Connect, Bond Connect, the newly established ETF and Swap Connect, as well as the Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme.
Macdonald thinks these schemes could attract more foreign investment if local regulators reformed some of their rules, such as broadening the product scope and quotas under the Wealth Connect, and the 50-50 restriction that requires a fund sold in China to have half of its assets sold in Hong Kong to be eligible for the MRF.
On the same theme, HKIFA’s Wong thinks current foreign holdings of mainland stocks and bonds, at about 4-5%, are too small to be commensurate with the importance of the world’s second-largest economy in global capital markets.
“They should be in the double digits, and we should aim to help streamline the process,” she stressed.
Wong hopes the new government will work closely with the mainland authorities to address some “teething problems” in the Stock and Bond Connect to reduce operational complexities and additional costs in line with international best practice.
For example, Stock Connect doesn’t allow block trade or A-share initial public offering (IPO) subscriptions, and the number of eligible stocks is too limited, she noted.
“If one of the objectives of launching these schemes is to help bolster Hong Kong’s position as a fund management centre and to attract more players to come to Hong Kong, major relaxations and even structural breakthroughs need to be made to unleash their full potential,” Wong said.
“I think that the step-wise approach to these connect schemes can at times appear to be a source of frustration for folks,” said State Street’s Macdonald.
However, he acknowledged that regulators here tend to bring a gradual mindset to how they operate, and they have pledged to expand the connect schemes. "It will be done eventually. It's a question of when," he said.
“If you want to build an onshore business in China, that's going to take you a number of years. Getting a product onto Wealth Connect, it can be relatively quick. But you need to take a long-term view in terms of profitability,” he said. “You have to take a decades-long view.”